Whether you’re a first home buyer or a seasoned investor, at some point in your life, you may be curious about what happens when you try to purchase property with an inheritance or other form of gifted money.
If you’ve recently come into or been offered a monetary gift from a family member or close friend, here’s everything you need to know about gifted deposits in Australia.
What is a gifted deposit for a home loan?
The recommended deposit for Australian home buyers is around 20% of the property value, and when that lump sum comes from inheritance or a gift from a family member, it is classed as a “gifted deposit”.
It is a fairly common practice and helps to avoid some of the pitfalls of low-deposit home loans. In Australia, paying less than 20% of the purchase price as your home loan deposit lands you with a very high loan-to-value ratio (LVR). Taking out a loan application with an LVR above 80% can indicate a higher level of risk to lenders, which may mean you’ll be offered higher interest rates, stricter loan eligibility requirements, and the need to pay lenders mortgage insurance (LMI).
Using a gifted deposit or inherited money can help to avoid these elements and make the upfront house deposit process much more straightforward, but depending on the circumstances, there can be additional challenges.
What do I need to know about using a gifted deposit or inheritance money for my home deposit?
If you are planning on using a cash gift or inheritance as a part or all of your home deposit, there are a few essential things to keep in mind.
With an inheritance, you will not be able to use any of that money until it is through probate. The legal process regarding wills and beneficiaries can be lengthy, so don’t get too trigger-happy with those property purchase plans. As nice as stepping up the property ladder can be, particularly for first-time buyers, there are often unexpected delays before that money can hit your bank account. It’s also important to consider whether there are any restrictions on inherited money — if inheritance money is willed to be used for education, it cannot then be used to buy a house.
If you’re using a cash gift from immediate family members, it will be easier to demonstrate this to a lender if the money is already in your bank account or savings account. This makes it demonstrably your money and much simpler to a provider.
If you are working with a mortgage broker, make sure to inform them of your situation regarding any monetary gifts and inherited money at the beginning of the process or whenever your circumstances change. They will be informed regarding the different requirements for different home loans and what is needed to meet lender eligibility standards.
Since a home loan approval or denial is not decided on deposit or loan amount alone, it’s also important to ensure your credit score is in good condition. One-off access to a large lump sum of money does not mean you meet serviceability requirements, meaning you will be able to make ongoing repayments, which can be a concern to lenders: they will want to see things like a clean rental record, regular payments on personal loans or car loans, no outstanding credit card debt, and historical bank statements.
How do I gift my child a home deposit?
Do lenders have additional requirements for borrowers using gifted deposits?
If you are using a cash gift or inheritance to get your foot in the property market, lenders may have some extra requirements for these borrowers to help ensure that borrowers are in a stable financial situation and can make continuing regular repayments on their property purchases.
- Inheritance: Lenders will usually want to see the inheritance money in your bank account before you use it for a deposit. Depending on the home loan in question, you may also need a copy of the will and the official Grant of Probate. If inheritance is not directly in your name, you will need a letter outlining your ability to access the funds legally.
Some lenders may also require that inheritance money has been in your bank account for at least three months. - Other cash gifts: Both inheritance and other cash gift recipients must be aware of lender requirements for genuine savings. This is considered to be money not received via gift or inheritance but rather via payment, investment, or other income streams.
To demonstrate your ability to make repayments over the course of your loan, you may also need to show records like pay slips and bank account statements as evidence of genuine savings.
Beyond this, the same requirements will apply to gifted deposits as to other home loans. You can still apply for a loan with a guarantor or look into government schemes like the Australian Government 5% Deposit Scheme (formerly the First Home Guarantee) for assistance beyond your initial home deposit.
